As the nation comes to grips with the scale of the Covid-19 epidemic and its accelerating spread, we have begun to realise that our daily lives will be disrupted for an extended period. Alongside the health consequences, there will be serious economic impacts: as the Taoiseach indicated on Tuesday, Ireland and our EU partners face the biggest economic challenge since the second World War.
A paper published on Monday by public health experts from Imperial College London helps us understand the possible timescale of the disruption. If governments had let the pandemic play out unchecked, it might have peaked by late May and been largely over by mid-summer. However, the cost would have been a very large number of deaths, and health services would have been overwhelmed.
The initial action taken to slow the spread of the virus in the UK would still have seen the demand for intensive care beds overwhelming the capacity of its health service to deliver. However, this approach might have seen the economic disruption largely complete by early autumn.
As the potential problems for the health service from such an approach became apparent over the last week, the UK government has switched to the policy, already adopted in Ireland and across the EU, of taking even more radical action to suppress the epidemic.
The research suggests that this policy of “suppression” will slow the rapid rise in infections in April. Thereafter, based on the South Korean experience, if we all stick to the HSE’s guidelines there could be a decline. However, the virus would still remain in the community and, until a vaccine becomes available sometime next year, this would still necessitate major restrictions on our behaviour.
Substantial disruption
If we can succeed in lowering the transmission rate it is quite possible that things could turn out better than this research suggests. However, it now seems likely that substantial disruption in normal economic activity in Ireland and in our trading partners could remain to the end of the year.
Already, dramatic cuts in employment are taking place in hospitality, entertainment, and tourism. Non-grocery retail is next, as people stay home. A collapse in world demand will lead to job losses elsewhere in the economy.
In total, based on very crude assumptions that could be proven wrong within days, we could see 15 per cent to 20 per cent of jobs in the economy disappearing, albeit temporarily, over the space of a few weeks, taking unemployment to the highest level ever. Output could fall by a similar amount. If that lasted just six months, national income for 2020 would drop by 5 per cent to 10 per cent. If the effect is prolonged into 2021, national income could fall even further. That would bring our standard of living per head back to where it was in 2002, and again in 2010.
Too weak to intervene
While in 2010 the State's finances were too weak to intervene to provide major insulation for the worst affected households and companies, this time round the State, along with governments across the EU, can borrow to try and ensure that by the end of 2021 most individuals and companies will be back on their feet. This will result in a dramatic rise in government indebtedness across the EU. As Patrick Honohan wrote on Wednesday, it would be best if borrowing were undertaken by EU institutions rather by national governments, to ensure access to low-cost finance for all governments, whether Italy or Ireland.
The first task today is to protect the incomes of those losing their jobs through an expansion of the welfare system. Banks will have to show consideration for those with mortgages who lose their jobs. A key challenge for the Government will be to identify the best and fairest scheme to enable private tenants, who will be unable to keep up rent payments, weather the crisis. This time landlords should share some of the burden.
The second task is to help businesses survive, and be in a position to recover. While loans on favourable terms will help, more will be required. For many small businesses that are badly affected, rent is a significant cost. Forbearance and burden-sharing by commercial landlords will be essential.
The third task will be to plan for the recovery, whenever it happens. While much of the economy may bounce back without assistance, resources may be needed to speed this process.
Government revenues will also take a big hit. For the incoming government this will mean that, even after this crisis passes, there will be very limited resources to implement pre-election promises.
